Australia’s strategic hedging in the Indo-Pacific: a ‘third way’ beyond either China or the US Lai-Ha Chan April 8 2019 Abstract Australia’s growing economic relations with Beijing in the past decade, in the midst of the rise of China, has sparked a continuing debate inside Australia about whether China is a friend or foe of Australia and accordingly about the premium that ought to be placed on the Australia-US security alliance. It has given rise to some assessments that Australia is now faced with a choice between China and the US. This paper, however, puts forward an argument that this binary choice is misplaced and that Canberra should avoid choosing one side at the expense of another. It makes the case that as a middle power, Australia should instead use ‘strategic hedging’, a combination of engagement and indirect/soft balancing strategy, to insure itself against the potential of China’s regional domination amid uncertainty about US strategic commitment to the Asia-Pacific region. Australia should continue its economic engagement with China and maintain its robust political and military ties with the US while seeking the opportunity to broaden the breadth and depth of its relations with other regional states. The 2017 Australian Foreign Policy White Paper has, to a certain extent, implicitly adopted this hedging policy by promoting the use of a mixture of balancing and engagement strategies to counter China’s regional domination. However, Australia’s hedging policy has yet to reach its full potential and can currently be described as ‘under-hedging’, i.e., not doing enough to reduce uncertainty about the future and risk. While the Turnbull government (2015-2018) had showed a strong commitment to working with the US, Japan and India in building a ‘free and open Indo-Pacific’, and the Morrison government has maintained this commitment, the weakest links of Australia’s hedging are in the failure to institutionalise the Quad, the informal strategic dialogue comprising Australia, the US, Japan and India, and to enmesh regional powers, notably India and Indonesia. Without enlisting more partners more firmly to its side, Australia is often sidelined by the other three members of the Quad and acts quite alone in the Indo-Pacific region. W: australiachinarelations.org @acri_uts Australia’s strategic hedging in the Indo-Pacific: a ‘third way’ beyond either China or the US 1 ‘As a sparsely settled continent on the edge rights [to] foreign policy [with the US]’ and advised of Asia, dependent on global markets for its that ‘it’s time to cut the tag’ with American foreign prosperity and on distant allies for its security, policy as Australia cannot risk supporting the US at Australia has faced as the central question of the expense of its trading relationship with China its foreign policy not whether it should engage (Sales and Wearring, 2017). In academic circles, some actively with the world, but how it should do so’ also proclaim that China has ‘wooed Australia’ by (Gyngell, 2005: 99). ‘aggressively promoting the importance of China’s demand for natural resources to the Australian Introduction economy’ (Kurlantzick, 2007: 214). As the largest trading partner of Australia since 2007, China has Since the end of the Second World War, Australia made use of its economic and commercial ties to has relied on the US as its security provider, and usurp a role previously held by the United States. is regarded as a ‘dependent’ ally of the US in the As Ikenberry (2016) has observed, there is a ‘dual Asia-Pacific (Bell, 1988). It is a member of the Five hierarchy’ in the Asia-Pacific region. Previously the Eyes intelligence sharing arrangement as well as a US upheld both economic and political hierarchies. staunch supporter of the Australia-New Zealand- However, as the second largest economy of the world United States security alliance (ANZUS). However, and the largest trading partner of many countries in Australia’s ever-deepening economic ties with China the region, China is now dominating the economic in the midst of China’s ascendancy has caught it in hierarchy while the US can only take the helm of the between China and the US (Lieto, 2016). Increasing security hierarchy. Australia’s economic relations concerns about Chinese influence in Australia have with China ‘[have] generated a degree of alliance drift sparked a continuing debate about whether China is between Australia and the United States’ (Thomas, a friend or foe and accordingly, about the premium 2015: 846). that ought to be placed on the Australia-US security alliance. However, opposing views with respect to Australia’s choice between the two powers also abound. Some Strategist Hugh White (2010) bluntly pointed out argue that Canberra needs to maintain its strong that Australia would almost certainly be faced military and political relations with Washington and with an unpleasant choice between its biggest join American efforts to balance against China’s trading partner (China) and its long-standing rise. The reason they proffer is that Australia shares security provider (the US). A looming problem for the same values, i.e., a democratic political system, Australia, White observed, was that while it hoped liberal economy and a commitment to the rule of law, its economic relations with China would continue to with the US (Shearer, 2011). In analysing Australia’s grow, it simultaneously expected America to remain response to a rising China, Manicom and O’Neil the strongest military power in the region and to (2010: 23) reached the conclusion that ‘while there is maintain its commitment to serving as Australia’s some evidence of Australia accommodating Chinese ultimate protector. To achieve these twin goals, White strategic preferences in Asia, there is no indication urged Australian policymakers to act as a mediator that it is realigning itself strategically towards between Beijing and Washington and nudge them China and away from its long-standing ally, the US’. into forging a power-sharing arrangement in the Tow (2012: 79) also observed that Sino-Australian region. Since then, the debate about the role and relations ‘would not occur at the expense of the position of Australia between the US and China Australia-American relationship’. In describing the has continued and intensified, noticeably among interrelationship between economic factors and policymakers and in the academic and policy analysis alignment decisions, Reilly (2012: 393) sums up that circles within the country. in the Australian case, economic dependence and security alignment ‘are inversely related’ – ‘greater Some argue that Canberra has not had an economic dependence encourages balancing independent China policy and should pursue behaviour’. one, establishing a greater policy autonomy from Washington. For example, Malcolm Fraser (2014), a The lively debates on how Australia ought to manage former Liberal prime minister, pointed out that the its relationships with China and the US appear to Australia-US alliance embodies ‘dangerous’ strategic have become more robust in the wake of the release ties with Washington. Paul Keating, a former Labor of Australia’s 2017 Foreign Policy White Paper, the prime minister, criticised Australia’s ‘tag-along first such document since 2003. Not only does it W: australiachinarelations.org @acri_uts Australia’s strategic hedging in the Indo-Pacific: a ‘third way’ beyond either China or the US 2 provide a broad blueprint on how Canberra should aimed at avoiding (or planning for contingencies safeguard its national interests in terms of its in) a situation in which states cannot decide upon economic prosperity and national security when more straightforward alternatives such as balancing, the international environment is ever-changing, bandwagoning, or neutrality.’1 Goh argues that states it specifies, more crucially, how Australia should instead ‘cultivate a middle position that forestalls respond to the rise of China, especially in light or avoids having to choose one side at the obvious of allegations that China attempted to meddle in expense of another.’ Using Southeast Asian states Australian domestic politics by funneling political as case studies, Goh’s research finds that the donations to Australia’s major political parties hedging policy adopted by these countries includes through Chinese business diaspora in the country three major elements. It entails, first, indirect or (Cave, 2017a). soft balancing with the need to persuade the US to counter China’s influence; second, engagement with However, the above analyses are premised on the China at various levels; and, third, involving regional hidden yet mistaken belief that there is only a ‘binary powers to ensure a stable regional order (Goh, 2005: choice’ – either China or the US – without any viable viii). She describes how a ‘hedger’ employs a mixture ‘third way’ or alternative available to Australian of balancing strategy in addition to engagement as policymakers. In contrast, this paper asserts that ‘insurance against the uncertain present and future there is an alternative to this binary choice: hedging. intentions of target states’ (emphasis added). For her, hedging is a ‘luxury of the relatively weak only’ What is hedging? because great powers cannot lay claim to hedging strategy. Hedging should be used by a relatively weak The term ‘hedge’ comes from investment and state to adopt a middle position, a combination of finance circles. The simplest explanation of hedging engagement and indirect/non-specific (including is ‘insurance’ – that is, insuring against a negative soft) balancing, towards another state (Goh, 2006). event or expected shortfall. In order to minimise exposure to various risks, investors seek the optimal While the 2017 Australian Foreign Policy White Paper hedging strategy to offset the risk of a negative event makes no mention of the word ‘hedging’, it is not (Branger and Schlag, 2004). Buying homeowner’s hard, if the paper is deciphered carefully, to find that insurance is one example of a hedging strategy.